For the Defense - Vol. 6 Issue 3 - 35

name and address, the Form 1040 now asks: At any time during 2020, did you receive, sell, send,
exchange, or otherwise acquire any financial interest in any virtual currency? "
.
The IRS's emphasis in this area suggests that there are tens of thousands, if not hundreds of thousands,
of unreported cryptocurrency accounts.
Cryptocurrency is Not Currency
Cryptocurrency is Not Currency
A cryptocurrency is a digital or virtual currency that is secured by cryptography. Many
cryptocurrencies are logged on decentralized networks based on blockchain technology, which is a
distributed ledger enforced by a disparate network of computers. This means that when one transaction
occurs, it is recorded on hundreds or thousands of computers at the same time. This makes it nearly
impossible to counterfeit or double-spend. A defining feature of cryptocurrencies is that they are
generally not issued by any government, rendering them theoretically immune to political interference
or manipulation.
A cryptocurrency is a digital or virtual currency that
is secured by cryptography. Many cryptocurrencies
are logged on decentralized networks based on
blockchain technology, which is a distributed
ledger enforced by a disparate network of
computers. This means that when one transaction
occurs, it is recorded on hundreds or thousands of
computers at the same time. This makes it nearly
impossible to counterfeit or double-spend. A
defining feature of cryptocurrencies is that they
are generally not issued by any government,
rendering them theoretically immune to political
interference or manipulation.
cryptocurrency is not issued by a foreign government, it does not meet the legal definition of currency.
The Supreme Court recently explained that " money was ordinarily understood to mean currency issued
Ethereum,
Examples of cryptocurrency include BTC,
and
Litecoin
Dogecoin.
Examples of cryptocurrency include BTC, Ethereum, Litecoin and Dogecoin. Ironically because
Ironically
because cryptocurrency is not issued by a foreign
government, it does not meet the legal definition
of currency. The Supreme Court recently explained
that " money was ordinarily understood to mean
currency issued by a recognized authority as a
medium of exchange. " Wisconsin Central Ltd. v.
United States, 138 S. Ct. 2067, 2070 (2018). The IRS
has previously stated that " [c]urrency in its usual
and ordinary acceptation means gold, silver, other
metals or paper used as a circulating medium
of exchange, and does not embrace bonds,
evidences of debt, or other personal property or
real estate. " 2
FinCEN, another bureau within the
Treasury Department, has a similar definition.3
Thus, despite its name, cryptocurrency is not
currency.
is treated as property. This means that it is
taxed as a capital asset like stock or real estate.
Therefore, cryptocurrency is subject to the capital
gains taxation rules. Of note, cryptocurrency held
for a period of one year or longer is subject to a
favorable long-term capital gains rate.
In Notice 2014-21, the IRS further explained
that a " taxpayer who receives virtual currency as
payment for goods or services must, in computing
gross income, include the fair market value of the
virtual currency, measured in U.S. dollars, as of the
date that the virtual currency was received. " Thus,
when received for providing goods or services,
cryptocurrency is income and taxed at normal
rates. However, its appreciation (or depreciation)
is taxed as a capital asset.
If one BTC were trading at $60,000 on January
15, 2021, and an artist sold a piece of artwork for
1 BTC, s/he would earn $60,000. If BTC plummets
to $30,000 on December 31, 2021, the artist must
report $60,000 in income even if s/he still owns the
one BTC.
Vol. 6, Issue 3 l For The Defense 35
The IRS Taxes Cryptocurrency Like Property
In a 2014 notice, Notice 2014-21, the IRS
provided some guidance on the taxation of
cryptocurrency.5
It explained that cryptocurrency
The Government of El Salvador recently
announced it would adopt BTC as legal tender
effective September 7, 2021.4
It is unclear how
the IRS's analysis will change in light of this
development.

For the Defense - Vol. 6 Issue 3

Table of Contents for the Digital Edition of For the Defense - Vol. 6 Issue 3